Real Estate Is Taxing

Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate

tax and break down complex concepts into
understandable, entertaining tax topics.

My name is Natalie Kalady, I'm
your host, and I am so excited

that you've decided to join me.

Microphone (Shure MV7): Hello, everyone.

Welcome to today's episode.

Over the last several
years I have noticed.

That, whether it is online or
with friends or in social groups.

It seems a lot of people hold
the same misconceptions about

things related to taxes.

So today's episode, we are going
to go through some of what I

consider the most common tax myths.

So we are tackling the top 10 on my list.

Starting with number one, it's a little
bit more of a pet peeve for people in tax.

Than it is an actual problem.

But I'm going to put it out there anyway.

First item on the list.

People using the term tax return.

And tax refund.

Interchangeably.

These are not the same thing.

Your tax return is the actual form that
you complete and submit every year.

For most people that is your 10 40
a tax refund is what you receive.

If you get money back because you
paid in too much tax during the year.

I've heard multiple times where
people will say that they are

waiting on their tax return.

Meaning there.

Direct deposit refund after filing.

That is not what you were waiting on.

The return is the actual submitted forms.

The refund is if you're
receiving money back.

I know it's petty, but tax
professionals out there listening

are absolutely shaking their heads.

Number two on the list of common
misconceptions related to taxes.

Is the idea that someone needs to
have a license to prepare tax return.

They absolutely do not.

There are two very common licenses
that you'll run into related to tax.

This is going to be the
enrolled agent license or EA.

Or your CPA license or
certified public accountant.

The EA credential.

Is a federal credential
that is backed by the IRS.

And it is typically someone
who specializes in tax.

Or tax representation representing
taxpayers before the IRS.

It requires passing a three part exam
that is all on different types of tax.

A CPA or a certified public accountant.

Is someone who has specialized in
accounting and may or may not work in tax.

It typically requires a
five-year degree experience and

then it has a four-part exam.

Of which only one of the four
is related to income tax.

Either one of these licenses means
that you are working with someone.

Who does hold a credential,

That does hold them accountable
to some level of responsibility.

However, neither of these are
required for someone to prepare taxes.

To start doing taxes.

Someone basically just needs a P 10,
which is an identifier from the IRS.

And to apply to be able to
electronically submit tax returns.

If you have those two things.

You do not actually need
to pass any kind of test or

credential or license or school.

To be able to do taxes.

So if you are a taxpayer
listening, And you were looking

for a new tax professional.

Take a look at their history.

Look at it.

If they went to school for
something, find out if they do

hold any kind of credential.

Because there are a lot of
practitioners who are uncredentialed.

I actually was before I got my EA license.

before I got my license, I had gone
to school for five years and worked in

public accounting for several years.

There are people who literally last
week worked at Kohl's and this week

decided to do taxes as a side hustle.

So check their background, see if
they have a credential, because

a common misconception is that
you need a license to do taxes.

And unfortunately you do not.

Microphone (Shure MV7)-1: Now that
we've got those items out of the way.

Let's move on to some more
technical tax items that there

are often misconceptions about.

The first one on my list is a
topic near and dear to my heart.

The 1 21 exclusion.

Misconception number three.

Is people think.

That the only requirement to
sell a primary home tax-free.

Is that you have lived in it too,
out of the most recent five years.

This leads to multiple times a week.

People being advised that if they
have a rental property that they've

owned for years and years, That
all they have to do is move into

it for a couple years and then they
will be able to sell it tax free.

That is absolutely not the case.

Specifically in code section 1
21, it dictates out the definition

of what non-qualified uses.

And this is any time.

When the property was used for a use other
than, as your qualified primary residence.

There's an exception.

If there's a limited amount of rental use.

After you most recently lived in it.

But if there was rental use prior
to the time that you used this

property as a primary residence,
Those years will be non-qualified use.

And the gain related to
those years will be taxable.

Even if you live in the house for two,
out of the most recent five years.

So tax myth, number three.

Is that you can move
into a rental property.

And as long as you live in it
for two years, you can sell it.

Absolutely.

Tax-free.

That is incorrect.

Tax myth.

Number four.

This is one that I am so passionate about.

I have it on a t-shirt.

Tax myth.

Number four.

Is that an LLC provides
you with tax savings?

And this is.

Absolutely not the case.

So an LLC is a legal entity.

It does not exist for tax purposes.

If all you have is a single member,
LLC, you set up an LLC where

only you are the owner of it.

It is completely disregarded
for federal tax purposes.

This means that whether you
do or do not have that LLC.

Your taxes are reported
exactly the same way.

And you are entitled to exactly the
same write-offs benefits, deductions.

Anything else?

Whether you have an LLC or you do.

Do not.

Now.

There are some exceptions to this.

You can have an LLC elect to
be taxed as an S-corp that

could have an impact on taxes.

Or if you had more than one person on
an LLC and a partnership has created.

That has some options to impact taxes,
but as its core, Just creating an LLC.

Does nothing tax-wise.

I'm going to say this again.

An LLC.

Does not equal tax savings.

This is misconception number four.

Incredibly widespread.

You do not need an LLC to have a business.

Nor does having an LLC create
a nonexistent business.

So also creating an LLC does not
mean you can now magically write

off all kinds of personal expenses.

None of that is true.

An LLC is merely there to separate
yourself from your assets or your

business from a legal point of view.

Zero tax benefits to an LLC.

Microphone (Shure MV7)-2: Common
tax misconception, number five.

This is one that is unfortunately
reinforced by some tax professionals

who have large followings on
social media and YouTube channels.

But tax myth, number five is that if
you employ your kids to work in your

business, Because their income will
likely be non-taxable to them as long as

it's kept under the standard exclusion.

As long as it's kept under
the standard deduction.

That you as a business, do not need
to issue them a W2 or file any kind of

tax returns to report their employment.

This is absolutely incorrect.

The nature.

Of if someone's income is going
to be taxed as an employee.

In no way, removes your requirements as
an employer To still file the required

quarterly reports, annual reports.

W2's.

The same way as you would for any
other employee who may or may not

have taxable income from your company.

Just because you know that your kids
will not need to take that form and

use it to file their own tax return.

Does not mean that you as an employer.

No longer have the obligation
to submit the filings and record

everything correctly on your part.

Additionally.

One of these secondary benefits
to employing your kids and having

them work for your business.

Is the idea of funding, a Roth
IRA for them at a young age.

A Roth IRA or most retirement
accounts you would need to prove.

Having earned income.

It is going to be pretty hard for
a child to prove earned income.

If they did not have to file a tax
return and additionally have no

type of proof of their employment.

So in any situation.

Even if your children do not
need to file a tax return.

As a result of their W2 income
from your business as the parent.

You as the parent operating a
business, still have to report

the payroll for your employees.

No matter what.

Especially if those kids
are going to fund an IRA.

You absolutely want to have that proof.

And make sure it is done correctly.

So tax myth, number five is
that you do not need to W2

your kids if they work for you.

That's incorrect.

Additionally, please do not 10 99.

Your kids, if they work for you.

In that case, any earnings over $400
requires the filing of a tax return.

Versus the much higher amount
of the standard deduction.

If they're paid as a W2 employee.

Plus.

A child is very unlikely to be.

An independent contractor.

Being paid on a 10 99.

Implies that you, as an independent
contractor are doing that same job

for more than one person, or you
could you're in control of your own

business, your hours, what to do.

Most seven year olds.

Aren't doing that.

So again, myth number five, you do not
need to W2 your kids who work for you.

That is incorrect.

It is completely valid to employ
your kids in your business.

You still need to file all of
the standard employment forms.

W2's quarterly reports,
annual reports, et cetera.

Common tax myth, number six.

TechSmith number six is
something that I see people.

Doing a ton of overly complicated
planning around for absolutely no reason.

Microphone (Shure MV7)-3:
This is the idea.

That the $18,000 annual gift tax limit.

Means that if you give a gift of
any more than that during the year,

It will create a taxable event.

And this is untrue.

The annual gift tax limit.

Is just a limit for when you
need to file a tax return.

If you give to more than
$18,000 during the year, you

need to file a gift tax return.

That's just for tracking purposes,
it does not generate any tax.

The only time.

Tax begins to be owed on gifts.

Is once someone reaches
the lifetime gift limit.

Which right now is over $13 million.

So that $18,000 a year amount.

Just keeps track of how much the
lifetime total is tracking the

amounts that go into that piggy bank.

And only if they hit that
$13 million lifetime limit.

Do the gifts start
creating a taxable event.

So lots of people I see doing lots
of planning for splitting gifts

between years, splitting them,
between tax, parents, spouse, doing

all kinds of things, because they
believe they're going to pay tax.

If they give their children,
some money to buy a house or

whatever they're going to do.

That's simply not the case.

The annual gift tax limit.

Is only a limit that if you go
above it, you have to submit a form.

You more than likely
will not need to pay tax.

Unless you've also gifted millions and
millions of dollars worth of stuff.

Tax myth, number seven.

Is that if you receive a bonus through
your job, It is taxed at a higher rate.

Microphone (Shure MV7)-4: And
this is simply not the case.

When you receive a paycheck.

Whether it is standard wages
or it includes a bonus.

Any amount of tax that is held from that.

Is withholding.

It's not an actual amount of
tax you're paying at that point.

It's an estimate.

When you receive a bonus
as part of your W2 income.

It's just always going to be
withheld at a higher rate.

The IRS considers this supplemental wages.

And it is going to by default
set to withhold at a 22%

rate against that amount.

what this means is that if at the end
of the year, Your effective tax rate

ends up being 10%, but on those amounts
of income, There was 22% withheld.

It means that they were holding
more than what you owed and you

were more likely than not receive
a refund at the end of the year.

So the amount of federal income
tax that is withheld from all of

your paychecks throughout the year.

Does not equate to the
amount of tax you're paying.

I know this sounds counterintuitive.

It's like, if you were trying to
save for a new car, And you knew that

it was going to cost about $10,000.

So you start putting aside a thousand
dollars a month for 10 months.

At the end of the 10 months
you go to buy the car.

And it actually only costs 8,000.

8,000 is the amount you actually
pay and you would get a refund where

you would have this 2000 leftover.

The same thing is happening here.

They're estimating how much your tax
should be at the end of the year.

And they're holding X amount per paycheck.

And then at the end of the year, when you
put everything on your tax return in, it

calculates your actual amount of tax owed.

You get a refund.

If too much has been withheld.

So in the case of a bonus,
it's not that you're actually

taxed higher on that income.

They're just holding more
of it back for taxes.

Because it is treated differently.

So you're not actually paying more.

You'll get it back at the end of the year.

It does suck that you have less at
the time, but just know that your

bonus is not actually taxed higher.

They're just holding a little more of it.

Common tax mix.

Common tax misconception, number eight.

Is how the 0% capital
gains tax rate works.

So long-term capital gains.

Currently have three different rates.

0%, 15% and 20%.

That 0% rate applies to your income.

And the bracket for that is about 47,000.

If you're single up to 94,000, if
you're married, Where you can get

that 0% rate on capital gains.

The misconception here comes into play.

When people think.

That to receive that 0% rate.

The total capital gain needs to
be under one of those amounts.

This is not the case.

That $47,000 amount.

Or at 90 four-ish, if you're married
your total income for the year.

Total income from all taxable sources.

Not just the gain and including the gain.

Needs to be under that limit.

So if in a taxable year,
You have a capital gain.

Of $40,000, but your W2 income
is a hundred thousand dollars.

That capital gain will not be at 0%.

Because when it is combined with your
other income, You are well above.

That limit for the 0% gain rate.

If during a year you had
a capital gain of $20,000.

And W2 income of $20,000.

You're single.

Your total income is under $47,000.

Everything.

Then that capital gain
will be taxed at 0%.

So common misconception, number eight.

Is that the 0% capital gains rate
or really any capital gains rate?

That the bracket is determined
based on the total amount of gain.

And that's not true.

The cutoff for the brackets is based
on the total amount of all income.

And then the correlating percentage rate
is what you pay on the capital gain.

A little bit confusing, but better to know
now than to think something will be taxed

at 0% and face a nasty surprise later.

Microphone (Shure MV7)-5:
Common tax myth, number nine.

Is that because a 10 99 is not
required to be filed for someone

unless they're paid more than $600.

People think that the flip side of this.

Is that if they've earned less than $600
doing some kind of self-employed work.

And so they will not receive a 10 99.

That income is not taxable.

This is not the case.

Just because you didn't meet the
required threshold for someone

to have to send you a form.

Does not mean that the
income is not taxable to you.

If you do work for five
different companies.

Doing graphic design during the year.

And they each pay you between
four and $500, but you received

no 10 90 nines because no one
person paid you more than 600.

You still have to report all of that
income, even though they did not have

a requirement to send you a form.

So all earned income is taxable.

Whether you receive a
form stating it or not.

So even if you have self-employment
income, And it's under $600.

You still have to legally report
that income as taxable income.

And.

If you have self-employment income.

That is any more than $400.

Even if that is your only income for
the year, you now also have a legal

obligation to file a tax return.

Normally you don't have to do if your
income is under the standard deduction.

But if you have more than $400
of self-employment income, You

now have to submit a tax return.

So common misconception, number nine.

Is that income below the 10 99 threshold
is not taxable to the recipient.

And this is incorrect.

You are responsible to report all of your
self-employment income, regardless of

if you receive any 10 90 nines for it.

And the final item on our list.

Number 10 for common tax misconceptions.

Number 10.

If you move into a higher tax bracket.

All of your income is now
taxed at that higher rate.

This is something I've seen very
poorly misinterpreted where people will

advise against taking a promotion or
try to advise against getting a bonus,

because if it moves you into that next
tax bracket, you're actually going to

pay so much because of the difference
that you'll end up making less money.

This is not how tax brackets work.

If you move from one tax
bracket into the next.

Only the amount of income that
is within that next bracket

is taxed at that higher rate.

For 2024 for a single taxpayer,
the 10% bracket goes to 11,600.

The 12% bracket kicks in.

At 11,000 6 0 1, up to 47,000 to one 50.

If during 2024.

You earned $11,500.

That would all be taxed at 10%.

If you ended up earning.

$12,000.

Only the $400.

That is now up into that next 12% bracket.

Would be taxed at the 12% rate.

Your entire $12,000 does not
get taxed at that higher rate.

Only the amount of income that
crosses over into that next bucket.

Gets taxed at that higher rate.

Microphone (Shure MV7)-6: So if
you are still listening, thank

you for hanging on till the end.

And as I mentioned at the beginning, I
think this is a good episode to share

with people, you know, because I'm
guessing that you or someone, you know,

or someone you have spoken to has made
one of these mistakes or is about to, and

maybe this episode can help prevent it.

These are incredibly
common misconceptions.

That I see over and over again.

So I'm just trying to get this
information out there and help

as many people as possible.

Clear up these misunderstandings.

Microphone (Shure MV7)-7: As always,
if you found value from this episode, I

would love if you shared like subscribed
and I will talk to all of you next week.

Mhm.